Everything old (in exchange protection) is new again

Mar­tin Wolf tells the EU mem­bers of the G7 who are cry­ing ‘foul’ over Asian exchange rate pro­tec­tion to suck it up. bq. Asian coun­tries have cho­sen “the same periph­ery strat­e­gy as imme­di­ate post­war Europe and Japan, under­valu­ing the exchange rate, man­ag­ing size­able for­eign exchange inter­ven­tions, impos­ing con­trols [on cap­i­tal], accu­mu­lat­ing reserves, and encour­ag­ing export-led growth by send­ing goods to the com­pet­i­tive cen­tre coun­tries (“Finan­cial Times(subscription page of the FT)”:http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1075982437393&p=1012571727126) Wolf refers to an inter­est­ing the­o­ry put for­ward by Michael Doo­ley et al. about the incen­tives for exchange rate pro­tec­tion by the new Asian mon­e­tary ‘periphery’—although it real­ly sounds a bit biz­zare to describe Chi­na as part of a ‘periph­ery’. bq. The eco­nom­ic emer­gence of a fixed exchange rate periph­ery in Asia has reestab­lished the Unit­ed States as the cen­ter coun­try in the Bret­ton Woods inter­na­tion­al mon­e­tary sys­tem. We argue that the nor­mal evo­lu­tion of the inter­na­tion­al mon­e­tary sys­tem involves the emer­gence of a periph­ery for which the devel­op­ment strat­e­gy is export-led growth sup­port­ed by under­val­ued exchange rates, cap­i­tal con­trols and offi­cial cap­i­tal out­flows in the form of accu­mu­la­tion of reserve asset claims on the cen­ter coun­try. The suc­cess of this strat­e­gy in fos­ter­ing eco­nom­ic growth allows the periph­ery to grad­u­ate to the cen­ter. Finan­cial lib­er­al­iza­tion, in turn, requires float­ing exchange rates among the cen­ter coun­tries. But there is a line of coun­tries wait­ing to fol­low the Europe of the 1950s/60s and Asia today suf­fi­cient to keep the sys­tem intact for the fore­see­able future. (“NBER”:http://www.nber.org/papers/w9971)

Peter Gallagher

Peter Gallagher is student of piano and photography. He was formerly a senior trade official of the Australian government. For some years after leaving government, he consulted to international organizations, governments and business groups on trade and public policy.

He teaches graduate classes at the University of Adelaide on trade research methods and the role of firms in trade and growth and tweets trade (and other) stuff from @pwgallagher